IDEAS home Printed from https://ideas.repec.org/p/zbw/vfsc17/168226.html
   My bibliography  Save this paper

Costless Capital Requirements

Author

Listed:
  • Flore, Raphael

Abstract

Arguments for costs of capital requirements in the long run are based on trade-off theories of capital structure. This paper provides a critical assessment of these theories by studying how the optimal capital structure can be modified, when a firm uses the financial markets to alter its cash flow distribution. I show that, for any initial set of assets, the implementation of a certain fund structure allows the firm to reduce its leverage and its bankruptcy probability without a loss of value.

Suggested Citation

  • Flore, Raphael, 2017. "Costless Capital Requirements," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168226, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc17:168226
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/168226/1/VfS-2017-pid-3306.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    2. DeAngelo, Harry & Stulz, René M., 2015. "Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks," Journal of Financial Economics, Elsevier, vol. 116(2), pages 219-236.
    3. Dybvig, Philip H & Zender, Jaime F, 1991. "Capital Structure and Dividend Irrelevance with Asymmetric Information," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 201-219.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    6. Heider, Florian & Ljungqvist, Alexander, 2015. "As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes," Journal of Financial Economics, Elsevier, vol. 118(3), pages 684-712.
    7. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-537, May.
    8. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    10. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2013. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2013_23, Max Planck Institute for Research on Collective Goods.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Erica Jiang & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2020. "Which Banks are (Over) Levered? Insights from Shadow Banks and Uninsured Leverage," NBER Working Papers 26903, National Bureau of Economic Research, Inc.
    2. Kamal Naser & Abdullah Al-Mutairi & Ahmad Al Kandari & Rana Nuseibeh, 2015. "Cogency of Capital Structure Theories to an Islamic Country: Empirical Evidence from the Kuwaiti Banks," International Journal of Economics and Financial Issues, Econjournals, vol. 5(4), pages 979-988.
    3. Luc Renneboog & Peter G. Szilagyi, 2008. "Corporate Restructuring and Bondholder Wealth," European Financial Management, European Financial Management Association, vol. 14(4), pages 792-819, September.
    4. Corrado DI GUILMI, 2008. "Financial Determinants of Firms Profitability: A Hazard Function Investigation," Working Papers 315, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    5. Lindner, Thomas & Muellner, Jakob & Puck, Jonas, 2016. "Cost of Capital in an International Context: Institutional Distance, Quality, and Dynamics," Journal of International Management, Elsevier, vol. 22(3), pages 234-248.
    6. Eisenbach, Thomas M., 2017. "Rollover risk as market discipline: A two-sided inefficiency," Journal of Financial Economics, Elsevier, vol. 126(2), pages 252-269.
    7. John P. Harding & Xiaozhing Liang & Stephen L. Ross, 2007. "The Optimal Capital Structure of Banks: Balancing Deposit Insurance, Capital Requirements and Tax-Advantaged Debt," Working papers 2007-29, University of Connecticut, Department of Economics, revised Feb 2008.
    8. Viral V. Acharya & Hamid Mehran & Til Schuermann & Anjan V. Thakor, 2012. "Robust capital regulation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 18(May).
    9. Toh, Moau Yong & Zhang, Yongmin, 2022. "Bank capital and risk adjustment responses to economic uncertainty: Evidence from emerging Southeast Asian economies," Research in International Business and Finance, Elsevier, vol. 60(C).
    10. Okahara, Naoto, 2018. "銀行の資本構成と自己資本比率規制 [Banks' capital structures and capital regulations]," MPRA Paper 89869, University Library of Munich, Germany.
    11. Ahmed, Yousry & Elshandidy, Tamer, 2018. "Why do over-deviated firms from target leverage undertake foreign acquisitions?," International Business Review, Elsevier, vol. 27(2), pages 309-327.
    12. Adrian Van Rixtel & Luna Romo González & Jing Yang, 2015. "The determinants of long-term debt issuance by European banks: evidence of two crises," BIS Working Papers 513, Bank for International Settlements.
    13. Wu, Xueping & Wang, Zheng, 2005. "Equity financing in a Myers-Majluf framework with private benefits of control," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 915-945, October.
    14. Andreani, Ettore & Neuberger, Doris, 2004. "Relationship finance by banks and non-bank institutional investors: A review within the theory of the firm," Thuenen-Series of Applied Economic Theory 46, University of Rostock, Institute of Economics.
    15. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
    16. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    17. Raghuram Rajan, 2012. "The Corporation in Finance," NBER Working Papers 17760, National Bureau of Economic Research, Inc.
    18. Shoaib Khan & Usman Bashir & Hend Abdulhadi Saleh Attuwaijri & Usman Khalid, 2023. "The Capital Structure Decisions of Banks: An Evidence From MENA Region," SAGE Open, , vol. 13(4), pages 21582440231, December.
    19. Kai Ding & Enoch Hill & David Perez-Reyna, 2021. "Optimal capital requirements with noisy signals on banking risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1649-1687, June.
    20. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc17:168226. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/vfsocea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.